Why was my loan application denied?!

by Mortgage Nerd on May 7, 2011 · 1 comment

“But my loan officer said that I was approved!” is heard all too often in the mortgage world these days.
In this article we will explore a couple reasons why a borrower can be approved immediately after the initial loan application but eventually denied once the lender’s underwriter gets a hold of the file.

Most Home Loan approvals work like this: After you meet with a loan officer and fill out a loan application, the loan officer will pull your credit report and import it into a underwriting software program (so basically a computer acting as an underwriter) along with your information in the loan application.

After analyzing your information for a brief minute the software will spit out an “approve” or “deny” decision and this is what the loan officer uses to tell you if you are approved or not, or to write a pre-approval letter for the Realtor. Most people think that the rest of the loan process is smooth sailing from this point. Wrong!

What some loan officers fail to mention is that the software is only providing a recommendation. A non-computer human called an “underwriter” still has to review all of your paperwork including pay stubs, tax returns, checking/savings statements, etc., and then confirm that the information in your loan application matches up with all of that documentation, among other things.

There are some red flags that the loan underwriting software can’t detect. Here are just a few potential deal killers:

  • If you are self-employed and your two tax returns show declining income from one year to the next than some lenders could deny your file for this reason alone. (The underwriting software only takes into account your current income)
  • If you are a W2 paid employee (a “wage-earner”) but you have a small side business that you used to declare a schedule C or E loss, some loan officers forget to subtract that loss from your overall income when they input the information into the software.
  • The software is capable of recognizing if your income comes from bonus, commission, mileage allowance, cell-phone allowance, etc, if the loan officer inputs it that way. Unfortunately some loan officers are either too stupid or too negligent to separate these types of income on your loan application and way too many files have ended up “denied” because of this.

The best way to prevent these loan denial surprises is to give your loan officer the most accurate information possible for the loan application. If possible, always bring copies of your tax returns (including all schedules and W2’s), pay stubs (3 most recent), and bank account statements (all pages). Know your dates of employment and know your address history for the last 2 years.

Another way is to work with a loan officer that has a lot of experience. There is just way too much that could go wrong from initial loan application to closing. I haven’t even mentioned the issues that can come up because of the appraisal or type of home. But I’ll save that for another post.

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